Modernist’s Asset Class Investing portfolios are strategically invested with a focus on long-term performance objectives. Portfolio allocations and investments are not adjusted in response to market news or economic events; however, our investment committee evaluates and reports on market and economic conditions to provide our investors with perspective and to put portfolio performance in proper context.
Global stock markets delivered robust gains in the third quarter 2017 as volatility fell in the U.S. and the dollar depreciated, supercharging International returns. Emerging Market stocks led the way with MSCI Emerging Markets up 7.9%. Non-U.S. developed markets, as measured by MSCI World Ex US, were up 5.6%, while the S&P 500 rose 4.5%.
Interest rates were flat for the quarter as a whole, ending at 2.33% on the 10-Year Treasury, though they did have a significant drop to 2.05% in early September before ramping back up in the final weeks of the quarter. Shorter term three-year rates ticked up a few basis points.
The U.S. Dollar Index, a measure of the value of the United States dollar relative to a basket of foreign currencies, fell again in the third quarter, with the U.S. dollar depreciating by 2.7% compared to foreign currencies.
U.S. Economic Review
Domestic economic data continued to plug along at a healthy, if not exciting, pace. Second quarter GDP increased at a 3.1% annual rate helped by exports, government spending and private inventory investment. The unemployment rate in August held steady for the quarter at 4.4%. Despite the unemployment rate at or below 5% for the last two years, wage growth has been relatively tepid, ticking up to just 3.4% in August. The Fed's preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, rose just 1.3% in August from the prior year.
Survey-based measures, such as the Institute for Supply Management (ISM) manufacturing index, rose to 60.8% providing encouraging signs of the overall health of the U.S. economy, while reporting that the overall economy grew for the 100th consecutive month.
Financial Markets Review
U.S. stock indexes rose to new highs while volatility all but vanished from the stock markets. International stocks in the Developed Value and Small areas, as well as Emerging Markets, saw even stronger gains. Bond prices saw volatility during the quarter, but finished near where they started. The Barclays U.S. Aggregate Bond Index advanced by 0.85% for the quarter.
In the U.S., Growth stocks led the way in performance during Q3. Large Value stocks were positive, though trailing their Large Growth counterparts. Small stocks outperformed across the board, with the Small Core segment outperforming Large Core by 1.2%. This Small cap performance occurred completely in the final month of the quarter, with the Russell 2000 gaining 6.24% in September.
Internationally, returns were strong across the board, with Small Growth leading the way at 7.5% for the quarter. The Large Value and Small premiums both showed up in Q3 with Large Value outperforming Large Growth by 1.6% and Small Core outperforming Large Core by 1.8%.
More aggressive models saw greater performance than more conservative models because of the higher returns in stocks compared to bonds. A diversified index mix of 65% stocks and 35% bonds would have returned 3.4% during the third quarter.